People’s Republics

There are growing doubts over the sustainability of China’s authoritarian model of development and greater recent praise for India’s democratic version. In October, US President Barack Obama’s economic adviser Larry Summers told a meeting of business leaders in Mumbai that the world in 2040 would be talking, not about a Washington or Beijing consensus, but a ‘Mumbai Consensus’ on economic development in the future. Chinese Premier Wen Jiabao did not go as far as Summers in elevating the Indian approach above China’s. But the premier ended his three-day visit to India last week by declaring that India’s rise had enhanced the confidence and strength of all developing countries.

Despite praise for both systems, the common wisdom is that the Chinese approach is superior to the Indian one in one respect: poverty reduction. After all, in 1980, around 80% of people in both countries lived in poverty. In India, it is now around 22% compared to about 12% in China. The assumption is that China’s State-led authoritarian model, although more menacing than India’s chaotic democracy, allow its leaders to plan China’s rise in a more ordered and manageable environment, to the ultimate benefit of its poor. But such an argument is less compelling than it would first appear when we take a closer look at what actually occurred since China began its reforms in December 1978.

Because China has been growing at almost 10% since 1980 (except for the ‘Tiananmen Interlude’ period from 1989-1992), the assumption is that the country has followed one model towards prosperity and poverty alleviation. In fact, China has actually gone through two significantly distinct reform periods.

The first was from 1979 until the Tiananmen protests in 1989. After the disasters of centralised Maoism, Deng Xiaoping did two big things. First, power was decentralised and local officials were given much more power to make economic decisions. Second, the four-fifths of the population who were peasants were allowed to use their land in any way they wanted and sell their products at market prices.

This so-called ‘household responsibility’ structure gave rise to millions of ‘township and village enterprises’ (TVE)—small-scale industries that began the industrialisation and urbanisation process. These TVEs were technically owned by the local collective but many were run like private industries. In Deng’s words, this was a “completely unplanned, spontaneous revolution that took us by surprise.”

But it worked. Eighty percent of the poverty reduction that occurred in China took place from 1979-1989. It had little to do with any authoritarian model or supposed authoritarian qualities, or the far-sighted long-term planning and wise counsel of Chinese Communist Party (CCP) leaders. Significantly, it was actually about the CCP relinquishing economic and social control over the country.

During this period, the de facto private sector received about three-quarters of all the country’s capital in the first 10 years of reform—the reverse of what is happening today. There was no discrimination against the private sector in favour of the State-controlled one; meaning that household incomes across-the-board were rising with the tide. It was a genuine bottom-up rather than the present top-down approach.

Following the countrywide protests that almost brought down the regime, the CCP deliberately retook control of the economy from the mid-1990s onwards: favouring the State-controlled sector over the private one in key economic areas in order to prevent the emergence of an independent economic middle class. Although GDP has continued to expand at an impressive pace, household incomes have been growing at a paltry 1-3% each year even as profits in the State-controlled sector expand by 15-20% per annum. Significantly, since the rise of ‘authoritarian development’ in China, poverty reduction advanced by approximately 1.5% each year, meaning that China has underperformed vis-a-vis India since the latter began reforms in the early 1990s. Indeed, given the State-controlled bias that accelerated from this century onwards, poverty alleviation has remain stagnant and some studies even suggest that absolute poverty in China has actually increased.

Compared to the Indian bottom-up approach which is driven by the private sector and domestic consumption, China’s top-down State-led model has created a country of some 150-200 million ‘insiders’ who benefit disproportionately from the fruits of economic growth. While measurements of income inequality have remained fairly constant even as India rises, Chinese society has become the most unequal in all of Asia. Although far from being a tranquil society, India does not have anywhere near the reported 124,000 instances of ‘mass unrest’ that occurred in China in 2009.

Even if Premier Wen and Prime Minister Singh would want to deny it, the Chinese and Indian approaches to economic development and poverty alleviation are being watched and compared by the 150 undeveloped and developing countries. Larry Summers might have been flattering his hosts in preparation for Obama’s visit to India which took place in November. But the weaknesses of the Beijing Consensus mean that we will be hearing much more about the Mumbai Consensus in the years to come.